Question

City Taxi Service purchased a new auto to use as a taxi on January 1, Year 1, for $20,800. In addition, City paid sales tax and title fees of $1,390 for the vehicle. The taxi is expected to have a five-year life and a salvage value of $6,980.

Required
a. Using the straight-line method, compute the depreciation expense for Year 1 and Year 2. (Round your answers to the nearest whole dollar amount.)
b. Assume the van was sold on January 1, Year 3, for $18,522. Determine the amount of gain or loss that would be recognized on the asset disposal. (Amounts to be deducted should be indicated with minus sign. Round the intermediate calculations to nearest whole dollar amount.)

	a. Year 1 Depreciation per year Year 2 Depreciation per year b. on sale

Answer 1

Answer a

Depreciation (as per SLM) = (Cost - salvage value) / Number of years

A	Cost	$ 22,190
B	Residual / Salvage Value	$   6,980
C	Number of years	5
(A-B)/C	Depreciation (SLM)	$   3,042

Year	Value at the beginning	Depreciation every year	Accumulated depreciation	Value at the end
1	$                         22,190	$                              3,042	$                                   3,042	$              19,148
2	$                         19,148	$                              3,042	$                                   6,084	$              16,106

Answer b

Gain/Loss = Sale value - Book value

= $18,522 - $ 16,106

= $ 2,416